Government Competition

How Does Government Unfairly Compete?

Government Competition/Utilization of the Private Sector

Since the first Hoover Commission in the 1940s, and through each White House Conference on Small Business in the 1980s-1990s, government duplication of and competition with the private sector has been a major public policy issue for government (Federal, as well as state and local), and has had a particularly severe impact on small business.  Despite a Federal policy since 1955 that “the Federal Government … will not start or carry on any commercial activity to provide a service or product for its own use if such product or service can be procured from private enterprise through ordinary business channels,” more than 850,000 Federal employees are in jobs that are considered “commercial” in nature. These Federal activities duplicate and compete with the private sector.  Most of the government’s commercial positions have never been studied for potential private sector performance.

Competitive Sourcing

The Bush Administration’s “competitive sourcing” program (implemented by OMB Circular A-76) is under attack.  The most recent revisions to the Circular have been stopped by numerous provisions added to appropriations bills and the Defense Authorization bill.  The entire circular would be stopped, in favor of the old, Clinton version, if the Van Hollen amendment to the FY06 Transportation-Treasury-HUD Appropriations Bill, which passed the House by a vote of 222-203, survived conference.  Moreover, according to OMB’s most current data, 91 percent of competitions were won by the Federal employees.  About half of all competitions did not attract a private sector offer.

Non-Profit Competition

Nonprofit organizations unfairly compete with private, for-profit businesses by engaging in commercial activities, but not paying taxes.  This also denies the government revenue.  Senate Finance Chairman Grassley and House Ways and Means Chairman Thomas both investigated abuses by non-profit and tax-exempt organizations in the 109th Congress, but there was no legislative remedy.  From YMCA’s competing with private health clubs to credit unions competing with banks to rural electric and telephone cooperatives competing with investor-owned utilities, nonprofit organizations provided special tax status under section 501(c) of the Internal Revenue Code, unfairly compete with the private sector.  Their special “exempt” treatment is clearly intended for “governmental” activities, rather than commercial.  A report by the tax-writing Committee on Ways and Means of the U.S. House of Representatives noted:

” The exemption from taxation of money or property devoted to charitable and other purposes is based upon the theory that government is compensated for the loss of revenue by its relief from financial burden which would otherwise have to be met by appropriations from public funds and by the benefits resulting from promotion of the general welfare.” Source: (Unfair Competition: The Profits of Nonprofits, James T. Bennett, Thomas H. DiLorenzo, Hamilton Press, 1989, p. 26) 

Prison Industries

Federal Prison Industries (FPI) and state prisons unfairly compete with the private sector.  Factories and services providing entities have been set up in hundreds of prisons across the United States, using cheap inmate labor to manufacture goods and perform services for government agencies, and in some cases, for the commercial market.  These inmate jobs come at the expense of law-abiding, tax-paying workers and in unfair competition with private companies, including many small businesses.   While provisions in recent Defense Authorizations bills and Appropriations bills have curbed FPI’s mandatory source status, comprehensive reform is still needed.


Schools of higher education are increasingly venturing away from their core missions of teaching and conducting basic research.  Financial pressures, ranging from reduced government funding to pressures to limit tuition increases have led university presidents to transform academicians into entrepreneurs.  Universities are generating revenues from commercial activities to supplement their budgets. Universities enjoy significant advantages over for-profit companies.  They are eligible for billions of dollars in grants from Federal and State governments.  They often have the ability to secure non-competitive, sole source contracts with government agencies.  They pay no taxes.  Their overhead – buildings, electricity, even equipment, is already paid for and is provided for “free”.  Their student labor force is either unpaid or compensated at well below prevailing market wages.  They carry no professional liability insurance, do not have to pay unemployment compensation and in many cases are exempt from social security contributions.  When universities enter into contracts to perform services, they usually insist on “best effort” clauses, which absolve them of ever completely finishing a project.  They are also recipients of millions of dollars in free or discounted hardware and software, donated from vendor firms so that students will learn on their systems, be proficient in their use upon graduation and instill a consumer loyalty that will translate into sales once these students move up in the ranks of their private sector employers. The advantages universities bring to the market make it virtually impossible for private firms to compete. Another form of university competition is in the schools’ bookstore.  These on-campus, university-owned retail operations go far beyond selling essential textbooks to students but compete with local, for-profit, tax-paying business in offering office supplies, clothes and apparel, computer equipment and goods under the blanket of the institution’s tax-exempt status.  Finally, universities historically competed with travel and tour companies by offering foreign trips that looked more like vacations rather than instructional endeavors.